The Dictator's Handbook (43 page)

When the time or circumstances are ripe for change, coalition members must recognize that if they do not pressure for an expansion of public goods and public welfare, then others will. Provided that the chances of success are good enough and the expected gains from success outstrip the costs involved in gambling on a revolt, an intransigent coalition and leadership will find itself besieged by an uprising. In this circumstance, such as was seen in Tunisia, Egypt, Yemen, and elsewhere in the Middle East and North Africa, and as we saw in the proxy fight at HP over Carly Fiorina's decision to merge with Compaq, people are willing to take big risks to improve their lot. They do so to call for exactly the same change as is widely favored by smart coalition members when and if any change becomes necessary.

A wise coalition, therefore, works together with the masses to foster an expanded coalition. The people cooperate because it will mean more public goods for them and the coalition cooperates because it will mean reducing the risk of their ending up out on their ear. Egypt's military leaders, essential members of the Mubarak government, understood this choice very well in the early months of 2011. They ensured their continued place as important players in Egypt's future by cooperating with the mass movement and supporting an expanded coalition, rather than hunkering down and risking losing everything.

What are the lessons here for change? First, coalition members should beware of their susceptibility to purges. Remember that it ticks up when there is a new boss, a dying boss, or a bankrupt boss. At such times, the essential group should begin to press for its own expansion to create the incentives to develop public-spirited policies, democracy, and benefits for all. Purges can still succeed if they can be mounted surreptitiously, so wise coalition members who are not absolutely close to the seat of power would do well to insist on a free press, free speech, and free assembly to protect themselves from unanticipated upheaval. And should they be unlucky enough to be replaced, at least they will have cushioned themselves for a soft landing. Outsiders would be wise to take cues from the same lessons: the time for outside intervention to facilitate democratic change or improved
corporate responsibility is when a leader has just come to power or when a leader is near the end of his life.

Knowing what people want, and the conditions under which they will oppose reform and the circumstances under which the swing coalition members will support reform, we can now turn to concrete ideas about fixing, at least partially, the worlds of business and governance.

The Green Bay Packers, a football team based in the cold climes of Wisconsin, are remarkable for the loyalty their fans show them. In fact, win or lose, Packer fans are nearly always satisfied. Virtually every one of their home games since 1960 has been sold out. Attendance averages 98.9 percent despite often appalling weather. The Packers have one of the longest waiting lists for season tickets among professional football teams.
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Despite being a small market team (Green Bay is a city of only about 100,000), they attract a larger, more loyal fan base than teams from many much larger cities. Their success with their fans, if not their success on the field, stems from their institutional structure.

The Packers are the only nonprofit, community-owned franchise in American major league professional sports. Their 112,120 shareholders are mainly local fans. The ownership rules preclude a small clique taking control of the team. No one is allowed to own more than 200,000 shares in the Packers and there are about 4.75 million shares outstanding. Thus, a tiny band of owners cannot easily overturn the many and run the team for their personal gain at the expense of the larger, small-owners fan base. The Packers have a forty-three-member board of directors.

We can see the relative representativeness of the Packers' essential coalition by comparing the size of their board of directors to Carly Fiorina's board at Hewlett Packard. Remember that the Hewlett Packard Board varied between ten and fourteen members. HP has about 2.2 billion shares outstanding. Roughly speaking, each Packard board
member nominally represents the interests of about 185 million shares. Each Packers board member represents about 110,000 shares. The Packers have a vastly larger winning coalition in absolute terms (forty-three to about twelve). They also have a vastly larger coalition relative to the size of their nominal selectorate—about 1,700 times larger. Can it be any wonder that the Packer owners are extremely happy with their company/team and that sentiments are more mixed when it comes to HP?

The lesson to be extracted from the Green Bay Packers is that if firms can be made to rely on a bigger coalition they are likely to do a better job of serving the interests of their owners. But how can corporate governance be turned on its head to make this happen?

Consider what the main difficulties are for shareholders. They suffer from two big problems: First, in big corporations there tend to be millions of little shareholders, a handful of big, institutional shareholders, and a bunch of insider owners. The millions of little shareholders might as well not exist. They are not organized and the cost to any of them to organize the mass of owners just isn't worth it. Second, the flow of information about the firm's performance comes from pretty much only two sources: the firm itself and the financial media. Few owners read annual reports or SEC filings and the financial media don't spend much time reporting on any one firm unless it is in huge trouble. By then it is usually too late for the shareholders to save the day.

We live in the age of networking. Much of the world, including owners of shares, Twitter and chat with “friends” on Facebook; they are LinkedIn; they can easily communicate with one another, even if they don't always do so. Surely it would be relatively simple to design firm-specific Facebooks or other networking sites.

Companies maintain lively web sites to put their view across but entrepreneur-owners have not stepped forward to do the same to help organize the mass of little owners and to provide a way for them to share views. Sure, there are bloggers writing about anything and everything, but there don't seem to be shareholder-controlled sites to exchange thoughts and ideas about a company that participants own in common. If something like this existed, the size of the influential,
informed voters in any corporation would go way up. Then, for the first time, boards would really be elected by their owners and then the board would need, like any leadership group, to be responsive to their large coalition of constituents. A simple change that exploits the Internet to be a conduit for increasing coalition size can turn the AIGs, Bank of Americas, General Motors, and AT&Ts of the world into big-coalition regimes that serve their millions of small owners instead of a handful of senior managers.

Ah, you are thinking, senior management can thwart such efforts. They will, as they already do, hold shareholder meetings in places most owners can't afford to go, or the meetings will be so brief that it will be impossible for dissidents to express their views (the preferred shareholder meeting strategy in Japan) and, after all, proxies pour in, turning millions of votes over to a handful of board members. None of that, of course, will stop shareholder control once the millions of little owners have a cheap and easy way to exchange views. Then they will set the rules—by majority vote—for who casts proxies. They can set some of their own up to represent competing “parties” and they can make the annual shareholders' meeting a purely decorative event. All such skeptics should remember that social networking web sites have already successfully mobilized revolutions and brought down governments. Changing corporate governance is far easier.

Corporations don't have armies that can go out and bash in the heads of dissidents. Pursue a course of connecting and informing shareholders, and we will see whether shareholders who limit CEO salaries do better or worse; whether firms that alter behavior to meet the social expectations of their shareholders do better or worse; and whether shareholders care more about employees or about themselves. Whatever the millions of little owners decide to do, they will be responsible for their own fate. Management will serve them just as democratic leaders are more constrained than autocrats to do what their citizens want.

We also ought to comment a bit on how not to improve corporate governance. In the wake of Enron's collapse and other big frauds, Congress decided to regulate corporate governance, ostensibly to
make it better. By now every reader knows that the interest of government leaders is not in making shareholders or even the man or woman on the street better off. Their interest is in making themselves better off. The regulations they imposed on corporate governance may have played well with voters, many of whom had little stake in many of the companies that were harmed by the regulations, but they have not made corporate governance better. The Sarbanes-Oxley Bill, passed in 2002, was supposed to tamp down management's greed and make companies responsive to their shareholders' interest in equity growth. Study after study, however, shows us that this is not what happened. In a brilliant summary of the statistical assessments of each of the governance planks in Sarbanes-Oxley, for instance, Yale law professor Roberto Romano shows that Sarbanes-Oxley did not do what it was “supposed” to do and often made things worse. Even a seemingly obvious reform—requiring an independent audit committee—turns out not to have been beneficial. Costly, yes! But it did not improve corporate governance or performance. Romano goes on to document the failings of Congress and regulators to get it right.
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The wishes of a large coalition of shareholders with a big stake in finding the right answers to any given corporation's problems is likely to make businesses work better. A coalition of government regulators bent on improving their own electoral prospects is not.

For the citizens of democracies, life is good. But good does not preclude better. At the very beginning we mentioned that we would be lazy and not constantly make subtle distinctions between the size of one democracy's coalition and another's. Rather, we have repeatedly leaned on the rhetorical distinction between democracy and autocracy. It is a useful convention, but such a broad brush risks blurring important distinctions. Our approach really depends on the subtle organizational differences in the size of the three political dimensions on which we focus. For convenience, these distinctions are
often dropped, but even small differences matter. It is time, then, to confront those small differences head on and see how good can be made better.

At the time of its independence, the United States was composed of thirteen states. They all had broadly the same first-past-the-post electoral rules and yet their record of performance was remarkably different. It is easy to be sloppy and think that they all had the same political system—governed by the United States Constitution—so that their differences must have come from somewhere else. In reality, however, their political systems were not the same. The constitution is silent on many issues that are central to governance. The constitution tells us nothing, for instance, about how to add up votes. As we saw, just by changing this simple rule, Harvey Milk could change American politics by getting elected to San Francisco's Board of Supervisors in 1977, even though he could not do so in 1975. Seemingly small differences in enfranchisement rules and districting decisions led to big disparities in the economic (and social) development of the States of the United States.

On average, the Northern states developed more rapidly than the Southern states. It is tempting to ascribe this to the traditional historical narratives and attribute the general difference to climate or slavery. However, a careful examination of the subtle differences between the states suggests that variations in their political institutions were the main culprit behind how differently they developed. Jeffrey Jensen, a former student of ours and now a faculty member at NYU, Abu Dhabi, did a very careful study of the differences in the size of the interchangeables, influentials, and essential groups across the original states.
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He understood that many thought the differences in development depended on slavery and climate and so he corrected for these possibilities. Jeff took the size of the slave population carefully into account just as he also took carefully into account how many frost-free days there were per year in each of the original thirteen states. He investigated the distinctions in electoral rules within the early American states that created different levels of dependency on a large or small coalition drawn from a large or small set of interchangeables. His discoveries may not only rewrite how we understand
America's early development, but they can also help us understand how to make our own modern democracy do better.

Who could vote differed greatly from place to place in the early United States. Obviously, slavery played an important—but not decisive—role. For purposes of allocating seats in the House of Representatives (and many state legislatures as well), slaves counted as three fifths of a person, but, of course, they had no right to vote. They were not alone. Women were not given the franchise until the twentieth century, and in the postcolonial period there were sizable genderbalance differences between the states. Some states also imposed substantial property or educational qualifications for voting, while others did not. Electoral districts were typically based upon county lines. Many of these inadequately reflected the population distribution, so in some legislative districts it took vastly more votes to win a seat than in others. The modern principle of one-person, one-vote was not yet the acknowledged law of the land.

The upshot of these differences was that state political leaders were accountable to greatly different numbers of voters—that is interchangeables and essentials. Through painstaking research, Jeff Jensen estimated the proportion of the states' populations that constituted the minimal winning coalition across states and across the years. It turns out that the size of the group of essentials varied enormously from a low of 8.8 percent of adult white males (and 0.9 percent of the total population) in South Carolina to a high of 23.9 percent of adult white males (and 4.9 percent of the total population) in Pennsylvania.